With financial engineering you can work wonders, but not miracles. For some time now, Dr. Marcellus Minenna, a Consob executive proposes a so-called "plan" (see , here) to solve the problems of the Eurozone.
The plan would consist of a gradual mutualisation of the public debts of the Eurozone countries. In general terms, the issue has been under the attention of economists and policy makers for many years and the challenge is well known: it is a question of finding mechanisms that make the proposal politically acceptable by the Germany and of the other countries that have a low public debt and a high credit standing, it being evident that for countries with a high debt, such as Italy, the pooling of public debts represents an enormous benefit.
The Minenna plan does not advance the discussion and foreshadows a fiscal architecture of the eurozone which would be absolutely unsustainable.
In the transition phase, which according to the plan would last ten years, the most risky debtors would pay at the ESM (European Stability Mechanism) an insurance premium commensurate with their risk. Thus, for example, Germany and the Netherlands would pay nothing, while Italy would pay something like 6 billion a year on average. In return he would have the possibility to issue gods construction sector of a new type, with a “risk sharing clause”.
In more understandable words, this clause would mean that the new BTPs would no longer be a debt of the Italian Republic, but would become nothing less than a European debt, for which all the countries of the Eurozone would be jointly liable! This is the piano's magic wand. To better understand the question, let us consider the system in full swing, ie at the end of the ten-year transition period. At that point, again according to the plan, the debts of individual Eurozone countries would no longer exist, as all would be transformed into European debt. Therefore, there would no longer be different interest rates between the different countries and it would no longer make sense to speak of an Italy risk or a Spain risk, etc. As a result, insurance premium payments would cease as there would be nothing left to insure. In the hypotheses of the plan, Italy would pay a final premium of around 2 billion in the tenth year and then nothing.
So when fully operational, in ten years' time, each eurozone country could issue debt against the entire eurozone, ie all the others. It is evident that no federation of states or regions can function on this basis, because each one must be responsible for its own budget, unless one imagines a strict control of national budgets by a central authority. Over United States, a single state certainly cannot issue federal debt. But that would not be conceivable in either Francia, where even the degree of autonomy of the decentralized entities is rather limited. Each decentralized body issues debt for which only this body is responsible, except for extraordinary operations: with respect to this principle, there are no exceptions in the world.
So the problem with this proposal is not only nor so much that it would not be acceptable to the Germans – why on earth should they take on our debt? -. The problem is that this proposal is incompatible with any hypothesis of a decentralized structure of the state and of the system of political decisions.
One may wonder, even if this does not appear to be Minenna's proposal, whether the proposed insurance scheme can be applied only to existing debt and not to new debts. Also in this case the answer can only be negative because, contrary to what Minenna claims, the risk premium measured by the market (based on the spread or the CDS) has nothing to do with the cost that the Germans or the Dutch would take over if the debts were mutualised.
If this were done, Germany's debt would go from 65% of GDP, today's value, to 89%, the average value of the debt/GDP ratio of the Eurozone. Italy's debt would drop from 132%, today's value, to 89%. It is evident that the fair price to induce Germany to take on 24 points of additional debt is exactly equal to 24 points (of its GDP), more or less a series of essentially political factors, which have little to do with the risks measured by the market. For example, on the one hand, Germany could reasonably require an additional payment to account for the moral hazard that this operation, like any amnesty operation, entails. On the other hand, Germany could evaluate the benefit deriving from the fact that the mutualisation of past debts would reduce the probability of a new sovereign debt crisis, the reason why operations of this type have been proposed. In short, there would be many political considerations in one direction and the other, but it would hardly differ much from the 24% benchmark.
In order for Germany to get its 24% and the accounts come back to an aggregate level, ie each country pays or receives the right amount, Italy would have to pay the difference between 132 and 89, or 43 points of GDP! Obviously, having made all these operations, nothing would change compared to today, in the sense that the net debt of each state would not change, unless the political considerations mentioned above. For example, Italy would have to go into debt (it is not clear with whom) for the amount of 43 points of GDP that it would have to pay to creditor countries.
The point is that there is nothing insurance involved in this operation, because there are no random events: any sensible person would agree to take on a debt whose (certain) current value is - let's say - a thousand euros only if in exchange he gets a payment of one thousand euros. Minenna's reasoning on insurance valued on the basis of market risk therefore appears incomprehensible.
Naturally, everything would change if Germany and the other creditor countries decided that the mutualisation of a part and certainly not of all their outstanding debts is the price to pay in order to avoid a new Euro crisis in the future and to maintain a solid leadership in Europe. It would be a strongly political decision, very courageous and perhaps even risky. For now, even this much more limited hypothesis is completely off the radar of possible things.
